Economics Dictionary of ArgumentsHome
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| Tariff increases: Tariff increases in economics refer to a government's decision to raise the existing taxes on imported goods or services. This makes foreign products more expensive for domestic consumers and businesses, aiming to reduce imports and boost the competitiveness of domestic industries. However, it can also lead to higher domestic prices, retaliatory tariffs from other countries, and disruptions to global supply chains. See also Tariffs, Trade policies, International trade, Tariff impacts._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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IMF Working Papers on Tariff Increases - Dictionary of Arguments
Ostry I 6 Tariff Increases/Furceri/Hannan/Ostry/Rose: Our results suggest that tariff increases have adverse domestic macroeconomic and distributional consequences. We find empirically that tariff increases lead to declines of output and productivity in the medium term, as well as increases in unemployment and inequality. In contrast, we do not find an improvement in the trade balance after tariffs rise, plausibly reflecting our finding that the real exchange rate tends to appreciate as a result of higher tariffs. The longer-term consequences of tariffs are likely higher than the medium-term effects that we estimate, but we truncate our analysis at the five year horizon to be conservative. Further, we perform considerable sensitivity analysis to demonstrate the robustness of our results. >Method/Ostry, >Tariffs, >Tariff responsivity, >Tariff impacts, >Protectionism, >Sensitivity analysis. Ostry I 14 [Our] results* (…) suggest that a one standard deviation (or 3.6 percentage point) tariff increase leads to a decrease in output of about .4% five years later. We consider this effect to be plausibly sized and economically significant; it is also significantly different from zero in a statistical sense. Why does output fall after a tariff increase? (…) a key channel is the statistically and economically significant decrease in labor productivity, which cumulates to about .9% after five years. Both these key findings make eminent sense; the wasteful effects of protectionism eventually lead to a meaningful reduction in the efficiency with which labor is used, and thus output.(1) Ostry I 16 (…) we have* implicitly assumed that tariff increases and decreases have symmetric effects. Is this assumption warranted? This is a simple matter to examine, since around 40% of our sample consists of tariff rises (with mean of 1.7ppt and standard deviation of 3.3), while 53% of observations consist of tariff falls (with mean of -1.8ppt and standard deviation of 3.4).(2) This variation allows us to test for asymmetry; we extend the baseline specification to allow the response to vary with the sign of the tariff change: yi,t+k - yi,t-1 = αi + γt + + βNP (1- DP i,t) ΔTi,t +νXi,t + εi,t where DP i,t is a binary variable which is equal to unity when the change in tariff is positive, and zero otherwise. Ostry I 17 Manifestly, the decline in output following a one standard deviation increase in the tariff rate is higher than the baseline; this effect is statistically significant, (…) for both output and productivity. In contrast, Panel B shows that the effects of a tariff fall on both output and productivity are much smaller. That is, there are asymmetric effects of protectionism; tariff increases hurt the economy more thanliberalizations help. One of the channels for the asymmetric effects related to tariff increases (as opposed to decreases) is due to intertemporal effects on domestic demand (Irwin, 2014)(2). The decline in tariffs usually results in a slight, immediate increase in demand because purchasers know that lower prices will prevail in the future. On the other hand, tariff increases usually lead to an increase in buying before policy implementation, followed by a collapse afterwards. In other words, the decline in domestic demand following a positive tariff shock is higher than the increase in domestic demand following a negative tariff shock. Ostry I 19 Advanced economies: for advanced economies, the decline in output after tariff increases is larger than in the baseline. Similarly, the effect on productivity is higher than in the baseline for advanced economies, but lower for other economies. One of the reasons for the different effects in advanced and emerging/developing economies could be due to the differential impact of trade liberalization. Leibovici and Crews (2018)(3) provide suggestive evidence that the potential gains from trade liberalization differ based on a country’s income level. Factors like financial development, limited infrastructure, and limited human capital prevent EMDEs from increasing production to sell internationally following trade liberalization. Consequently, EMDEs are disproportionally less affected during trade protectionism episodes, since they reap less benefits from trade liberalization to begin with. * Davide Furceri, Swarnali A. Hannan, Jonathan D. Ostry, and Andrew K. Rose. (2019). Macroeconomic Consequences of Tariffs. IMF Working Paper. WP/19/9. International Monetary Fund. 1. Employment increases by about 0.5 percent but the effect is not statistically significant. 2. Irwin, Douglas A., 2014, “Tariff Incidence: Evidence from U.S. Sugar Duties, 1890-1930,” NBER Working Paper No. 20635. 3. Leibovici, Fernando, and Jones Crews, 2018, “Trade Liberalization and Economic Development,” Economic Synopses, No. 13, Economic Research, Federal Reserve Bank of St. Louis. https://research.stlouisfed.org/publications/economic-synopses/2018/04/20/tradeliberalization-and-economic-development. - - - Rieth I 2 Tariff increases/Boer/Rieth: (…) we find* that both shocks to trade policy have broad general equilibrium effects. Trade/Investments: Exogenous increases in tariffs reduce imports, exports, and investment strongly and persistently. Rieth I 3 Prices: Consumer prices increase and the exchange rate appreciates. Despite the improvement of the trade balance, output falls persistently below trend because all private domestic demand components contract. We estimate a general equilibrium import elasticity of –0.2 in the short run and of –0.8 after six years. Import prices: The pass-through to import prices is 0.1 upon impact and 0.5 in the medium run. Results from local projections of disaggregated data on the tariff shocks suggest that imports, exports, and investment fall in nearly all sectors. Employment: The employment effects are ambiguous. Uncertainty: Trade policy uncertainty shocks also affect macroeconomic dynamics. They depress imports and investment. However, output is less affected because the exchange rate tends to depreciate and exports to rise, compensating the domestic demand contraction. Across sectors, investment falls, while exports mostly increase. The employment effects are again ambiguous. >Unemployment, >Trade policy, >Tariffs, >Tariff impacts, >International trade, >Free trade, >Prices, >Investments. * Lukas Boer and Malte Rieth (2024). The Macroeconomic Consequences of Import Tariffs and Trade Policy Uncertainty. IMF Working Paper 24/13. International Monetary Fund._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
IMF Working Papers Ostry I Jonathan D. Ostry Davide Furceri Andrew K. Rose, Macroeconomic Consequences of Tariffs. IMF Working Paper. WP/19/9.International Monetary Fund. Washington, D.C. 2019 Rieth I Malte Rieth Lukas Boer The Macroeconomic Consequences of Import Tariffs and Trade Policy Uncertainty. IMF Working Paper 24/13. International Monetary Fund. Washington, D.C. 2024 |
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